Nebraska state regulators closed Ericson State Bank on Friday, February 14th. This is the first bank to fail in 2020. Four banks failed in 2019, and no banks failed in 2018. Bank failures have been rare in the last few years. The number of bank failures spiked during and soon after the last financial crisis, rising from 25 in 2008 to 140 in 2009, and peaking at 157 in 2010.
According to this FDIC press release, “Ericson State Bank had approximately $100.9 million in total assets and $95.2 million in total deposits. In addition to assuming all of the deposits, Farmers and Merchants agreed to purchase approximately $9.6 million of Ericson State Bank’s assets. The FDIC will retain the remaining assets for later disposition.”
All deposits of the failed bank, even those above the FDIC limits, were transferred to the new bank as described in the FDIC’s FAQs:
No one lost any money on deposit as a result of the closure of this bank. All deposits, regardless of dollar amount, were transferred to Farmers and Merchants Bank.
Both insured and uninsured deposits were transferred to Farmers and Merchants Bank. Thus, even depositors who had over the insurance limits had no loss in this failure.
Occasionally, banks fail and uninsured deposits are not covered. That happened last year in the first 2019 bank failure. In that case, the acquiring bank only agreed to assume insured deposits. Depositors who had over the insurance limits were at risk of losing some or all of their uninsured deposits. In previous years, banks have also failed without an acquiring bank. In those cases, the FDIC liquidates the bank and sends checks to depositors of only their insured deposits.
For this February bank failure, the only concern for depositors of the failed bank are those with CDs that had high rates. Those high rates may not last as the FDIC describes in its FAQs:
Interest on deposits accrued through close of business on Friday, February 14, 2020, will be paid at your same rate. Ericson State Bank’s rates will be reviewed by Farmers and Merchants Bank and may be lowered; however, you will be notified in writing of any changes. You may withdraw funds from any transferred account, regardless of whether your interest rate changes, without early withdrawal penalty until you enter into a new deposit agreement with Farmers and Merchants Bank.
Cause of the Failure
DepositAccounts.com had given Ericson State Bank a “C” grade on its financial health based on data from its September 30, 2019 call reports (December 31, 2019 call reports won’t be released by the FDIC until later this month.) Its Texas Ratio of 67.25% wasn’t terrible, but this is below average. Typically, banks most at risk have a Texas Ratio near or greater than 100%.
The failure of Ericson State Bank differed from the first bank that failed in 2019 and the last bank to fail in 2017. In both of those cases, fraud was the primary cause of the failures. Due to the fraud, the financial health grades didn’t help predict the failures. Also, the fraud caused the acquiring banks to decide to only assume the insured deposits. Customers at those banks with uninsured deposits were at risk of losing those deposits.
Those previous two bank failures were an important reminder why everyone should make sure that their deposits (total of both principal and interest) are kept below the FDIC and NCUA insurance limits at each of their banks and credit unions.
Credit Union Liquidations and Conservatorships
There have been no new credit union liquidations or conservatorships since the first half of last year. One credit union was liquidated in March 2019, and two credit unions were placed into conservatorship in April and May. In a conservatorship, the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.
- FDIC list of failed banks
- NCUA database of failed and conserved credit unions
- Latest FDIC info on deposit insurance